In 2022, Congress passed the Inflation Reduction Act (IRA), a comprehensive legislative measure that includes various provisions to promote the growth of clean energy production and enhance domestic manufacturing capabilities. With this new law, came changes to tax credits and incentives. This presented manufacturers with significant opportunities to finance new renewable energy projects and invest in domestic manufacturing of equipment like electric vehicles (EVs).
The primary objective of the IRA is to bolster manufacturing competitiveness by encouraging onshoring, generating job opportunities, and expanding the renewable energy sector within the United States. Manufacturers should take note of three important tax provisions that the IRA either introduces or updates:
- The qualifying advanced energy project investment tax credit (the 48C credit)
- The advanced manufacturing production tax credit (the 45X credit)
- The qualified commercial clean vehicles credit (the 45W credit)
Qualifying Advanced Energy Project Investment Tax Credit (the 48C Credit)
The America Recovery and Reinvestment Act was enacted by Congress in 2009 by then-President Obama. As part of this act, the 48C credit was introduced. Initially, this credit applied to investments in facilities that produced renewable energy assets and other property aimed at reducing greenhouse gas emissions.
The IRA, passed more recently, has introduced additional funding and expanded the scope of qualified energy projects eligible for the 48C credit. This expansion now encompasses facilities involved in the manufacturing of components used in carbon capture, utilization and storage, energy grid modernization, renewable fuel generation and refinement, electric vehicle components, as well as recycling facilities for eligible components. Manufacturers investing in the construction, re-equipment, or expansion of a facility that meets the criteria of a qualified advanced energy project can apply for an allocation of the 48C credit.
Under the new provisions, the IRS, in consultation with the Department of Energy, is set to award a total of $10 billion in 48C credits through a two-step application process. Out of this amount, $4 billion is specifically reserved for projects located in energy communities. The base credit amount is 6%, but it can be as high as 30% if applicants satisfy prevailing wage and apprenticeship requirements. Recipients of the credit can claim it on their federal corporate income taxes for a percentage of eligible investment costs that have been put into service during the current tax year. In addition, the new IRA credit transfer provisions allow corporations or shareholders of flow-through entities who are unable to utilize the credits themselves to sell them for cash.
The application process for the 48C credit consists of two phases. In the first phase, applicants are required to submit a concept paper to the Department of Energy, outlining the merits and commercial viability of their proposed project. Based on these concept papers, the Department of Energy will provide guidance to taxpayers, indicating whether they should proceed with submitting a formal application. The IRS and Treasury anticipate conducting at least two rounds of funding under the 48C credit program. The first round, commencing on May 31, 2023, and closing on July 31, 2023, will allocate $4 billion of the total $10 billion designated for 48C credits. A second round of funding is planned for 2024, open to organizations that were not successful in obtaining funding in the first round.
48C Considerations for Manufacturers
To maximize their chances of securing the 48C credit, companies should carefully evaluate the merits of their projects before initiating the application process. The Department of Energy will start accepting concept papers on May 31, 2023, and since the application process will be competitive, it is crucial to provide a well-structured overview of the proposed project’s timelines, financial aspects, and its potential to drive innovation and job creation.
Although the application form for the second step is not yet available, applicants should focus on presenting a compelling narrative that highlights the project’s significance to the U.S. economy and the renewable energy industry. It is important to demonstrate how the 48C credit will play an integral role in the project’s success. It’s worth noting that applying for the 48C credit requires a substantial investment of time and resources, and submitting an application does not guarantee the award of the credit.
Considering that the initial allocation of $10 billion for the 48C credit may not be replenished, manufacturers are advised to submit their applications as early as possible. It is also essential to ensure that proposed projects can be completed within the prescribed timeframe; otherwise, the awarded credits may be forfeited. Manufacturers planning to construct entirely new facilities should explore potential opportunities to negotiate additional incentives with state and local economic development authorities.
Advanced Manufacturing Production Tax Credit (the 45X Credit)
The 45X credit is a newly established production tax credit aimed at incentivizing the production and sale of energy components within the United States, with a specific focus on solar, wind, batteries, and critical mineral components. To be eligible for the credit, manufacturers must produce these components domestically and sell them to unrelated parties. The Department of Energy has provided a comprehensive list of eligible components, and the credit amounts vary based on the specific component. Manufacturers have the flexibility to monetize the 45X credits through direct payments from the IRS for the first five years or transfer a portion or the entirety of the credit to another taxpayer using the direct transfer system. This new tax provision provides manufacturers with opportunities to support domestic production and enhance the growth of the renewable energy sector while benefiting from financial incentives.
45X Considerations for Manufacturers
The 45X credit differs from the 48C credit in that it is a statutory credit, meaning manufacturers do not need to submit an application for approval. While there is no predetermined funding limit for the 45X credit, it will begin to phase out starting in 2030 and will be fully phased out after 2033. It’s important to note that manufacturers cannot claim 45X credits for any facility that has already claimed a 48C credit. The IRS is expected to provide further guidance to clarify the relationship between the two credits in cases where a manufacturer operates multiple eligible facilities for both credits.
Another important consideration is the proposed regulations for the qualifying new clean vehicles credit (30D). These regulations outline specific criteria for vehicles to be eligible for the new clean vehicle credit. Such vehicles must source a defined threshold of critical minerals from either the United States, countries with which the United States has a free trade agreement, or through recycling in North America. Furthermore, the proposed regulations require a certain threshold of battery components to be manufactured or assembled in North America. It’s worth noting that the geographic requirements for the 45X credit are more limited, restricting production to the United States or U.S. possessions. Organizations should be aware of these requirements when evaluating their eligibility for the credits and ensure compliance with the specified criteria.
Qualified Commercial Clean Vehicles Credit (the 45W Credit)
The Qualified Commercial Clean Vehicles Credit, also known as the 45W Credit, is a newly introduced credit available to businesses and tax-exempt organizations that purchase qualified commercial clean vehicles. This credit can provide a maximum benefit of up to $40,000, but if the gross vehicle weight rating is below 14,000 pounds, the maximum allowable credit is $7,500. The value of the credit is determined based on the lesser of two factors: either 15% of the vehicle’s cost basis (or 30% if the vehicle is not powered by a gas or diesel internal combustion engine), or the incremental cost of the vehicle.
The incremental cost refers to the difference between the purchase price of the clean vehicle and the price of a comparable vehicle that runs solely on gasoline or diesel internal combustion engine, while being similar in size and use. There is no set limit on the number of 45W credits that an organization can claim, and the IRS is currently in the process of finalizing the credit claim form.
45W Considerations for Manufacturers
Manufacturers seeking to transition to an electric motor fleet or qualified mobile machinery can leverage the 45W credit to mitigate investment expenses. However, there are various challenges that may restrict the immediate effectiveness of the 45W credit. One obstacle is the higher cost associated with electric vehicles compared to those powered by fossil fuels. Given the current economic uncertainty, some manufacturers might hesitate to make substantial investments in a new fleet if their existing vehicles are not yet due for replacement. Additionally, the limited availability of a consistent nationwide charging infrastructure and the lack of clear guidelines on what qualifies as “mobile machinery” could impede the widespread adoption of the credit.
Maximizing Opportunities in the Future
Manufacturers should carefully evaluate their planned projects to uncover potential opportunities for leveraging the newly available tax credits introduced by the IRA. It may be necessary to make adjustments to investment plans to meet the criteria for specific credits. The IRA places significant emphasis on supporting the U.S. manufacturing sector, making it essential for manufacturers to capitalize on these tax incentives as part of their overall strategy for growth and success.
For more information on how these provisions and other tax credits and incentives may impact your manufacturing organization, please contact Tim Reynolds at 828.322.2070 or at tim@dhw.cpa.